Nepal | May 28, 2020

Foreign direct investment: Barriers and benefits

Needika Adhikari
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Nepal still has a long way to go in acquiring the benefits from FDI by integrating into the global economy. “A problem well put is half solved”

FdiFor the first time, the foreign inward investment in developing countries has outpaced the foreign investment in developed countries.

The total foreign investment in the world shrank 16% to USD 1.3 trillion in 2014, whereas the foreign investment to developing countries saw 2% rise and now stands at USD 681 billion (around 55% of global foreign investment).

These figures are more overwhelming if we consider the volatility in global economy and uncertainty in the political scenario.

One can conclude that businesses have acknowledged developing countries as the major driver of growth over the coming years. This presents unprecedented opportunity for developing countries like Nepal, which can benefit from this transformation, if the countries work towards making the environment conducive to business.

The foreign firms invested $128bn (£84.8bn) in China making it the leading recipient of FDI across the developing countries while India is only few steps behind. India, in particular, after the 2014 elections has been making headway with the Indian government taking strong strides towards promoting investment and protecting investors.

As per World Investment Report 2014, in Nepal investment of 2.2194 billion dollars is made by India and 247 million dollars investment by China. At present, if only we can bring changes in FDI policies (making them more clear and effective) along with good governance, Nepal shall have an immense strategic advantages.

But it is unfortunate that Nepal has not been able to take full advantage of the geographical proximity with these two economic superpowers.

Nepal has not been able to even exploit its own potential because of lack of protection as well as promotion to its investors. When it comes to the promotion and management of foreign investment, Nepal should amend its institutional capability through training.

The queries of the investors must be addressed instantly by the Department of Industry (DOI) and other governmental agencies through efficient and equipped modern facilities.

One of the active governmental agency today is Investment Board of Nepal (IBN) which was established in 2011 with the objective of promoting economic development of Nepal by creating an investment friendly environment.

The legal loopholes of Nepal are additional causes for reduced amount of FDI in Nepal.

Although the law has made explicit provisions for arbitration within the framework of the United Nations’ Commission for International Law for the settlement of foreign investment related disputes, the restrictions while exercising full freedom to resolve the disputes are not compatible with the legal risk management policies of most multinationals.

Another key issue in Nepal is the repatriation of foreign currency. Nepal Rastra Bank plays an important role in issuing permission and making necessary arrangements to repatriate money in convertible currency. But the approval from DOI is not clear.

Although Foreign Investment and Transfer of Technology Act allows repatriation of foreign currency, the investors have to face a lot of problems in repatriating the dollars.

For instance, a foreigner comes to Nepal and makes investment in dollars when incorporating the company; he cannot show investment in dollars, he or she needs to convert it into Nepali rupees at the time of investment.

When one invests in dollars, converting the money into Nepali, the exchange rate fluctuation creates problems for investors as the Nepali currency is weak.

Thus there must be clarity in the law to address foreign currency exchange risk. The laws, regulations and policies must be in harmony with the Foreign Investment and Technology Transfer Act.

The large amount of investment in Nepal is from India. This demands maintaining industrial zones and progressive and longer transport windows for Indian vehicles for export and hassle-free operations.

Investors also asked the government to prioritize manufacturing sectors over trading business. Indian investors also asked for tax rebate in reinvestment of dividend.

The political instability and inconsistency in the successive government policies along with the insufficient response of the bureaucracy are the major reasons for a decline in FDI.

The unclear laws governing the foreign investment policies, time consuming and complex procedures for approval and registration of foreign investments to invest in Nepal are other factors for less FDI inflows.

Thus, effective development strategy, proper exposure and promotion of business opportunities, and strengthening institutional capabilities can help go a long way in terms of attracting foreign investment.

The new Constitution in Nepal can be an opportunity for all governmental as well as the non-governmental organizations to formulate new policies by reviewing the existing investment policies. In order to promote the investments, all the organizations working in collaboration can be an elevating approach.

Nepal still has a long way to go in acquiring the benefits from FDI by integrating into the global economy. What is to be remembered is “a problem well put is half solved”.

FDI in Nepal can take a huge leap at this point of time if priority is given to the predictable and transparent policies. Board of Investment (BOI) along with other governmental agencies must prioritize private investments and disseminate information regarding government’s seriousness towards prospects of joint ventures industries and investment.

A version of this article appears in print on August 09, 2016 of The Himalayan Times.

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